Capitaland Retail China Trust announced a planned acquisition of 3 malls from their sponsor Capitaland recently. As a unitholder, I obviously have a vested interest to know more. Here are the key highlights, with some financing structure speculation at the end.
The 3 properties consist of CapitaMall Xuefu and CapitaMall Aidemengdun in Harbin, and CapitaMall Yuhuating in Changsha. Changsha and Harbin are the respective provincial capitals of Hunan and Heilongjiang. This continues the REITs recent trend of acquisitions and diversification away from Tier 1 cities into more Tier 2 cities.
AUM for CRCT will increase by 19% to S$3.8 billion. This desire to bulk up is in line with recent S-REIT M&A trends to make themselves more attractive to institutional investors and allow them to add more weapons to their arsenal to grow.
Purchase Valuation and NPI Accretion
2 valuers were engaged as part of this transaction – Cushman & Wakefield and JLL. The agreed purchase price was at a discount of 1.2% and 0.2% to the respective valuations.
Acquisition Cost and Financing details
Total acquisition cost is expected to be $505.4m comprising of:
- Purchase consideration & shareholder loan – $489m
- Acquisition fee to managers – $5.9m
- Professional and other fees – $10.5m
It is due to the lack of financing details that led to the quick sell-off in the unit price of the REIT.
I’ve read conflicting analyst research reports on whether a DPU accretive deal can be structured. OCBC broke ranks and even downgraded the REIT to SELL from HOLD off of this news. This is probably partly why the REIT sold off this week.
Separately, CEO Tan Sze Wooi in an article with The Edge Singapore (premium article) gave some insight to management’s thinking:
In one paragraph, the article even describes pro-forma impacts of the acquisition. Given the way it was written, I wasn’t sure if this was the view of The Edge or the CEO’s view but here it is:
My independent calculation
Given all the conflicting views, who is right?
I decided that the only way to know is to do the rough work myself and form my own opinion.
Disclaimer: I approached this exercise logically based on my accounting and REIT knowledge. As to why my calculations gave slightly different results from the professional analysts, I have no idea. Do let me know where I messed up (if any) so that I can learn as well.
I worked backwards by making adjustments to total assets by adding target property value and removing distributions that have yet to be paid. I apply a 38% target gearing mentioned by the CEO and compared it to current borrowings to obtain the debt headroom. I obtain the corresponding equity to be raised by subtracting debt headroom from the cash consideration associated with the acquisition.
Based on this computation, I arrive at a funding mix of $324m of debt and $275m of equity to be raised. Pretty close to what is in the article by The Edge.
Pro-forma NAV impact
Using the expected equity fund raise of $275m and taking into account acquisition fee of $5.9m that will be paid in units, I plotted a graph of Pro-forma NAV vs Equity Issue Price from $1.20 to $1.60.
At issue price of $1.51, yesterday’s closing price, pro-forma NAV is expected to be about $1.58. This represents a slight dilution in NAV from $1.59.
Of course, rights / private placements will be issued at a discount to current share price to attract interest. Pro-forma NAVs range from $1.52 – $1.58 depending on the issue price from $1.20 to $1.50.
On this evidence, NAV dilution is not expected to be great for this acquisition.
Pro-forma DPU impact
Computing pro-forma DPU can be very complicated and with limited information, I could only guess. As such, I did a very rudimentary computation of distributable income by making adjustments to FY2018’s figure.
- Debt financed at 2.96%, CRCT’s current cost of debt
- Base Management Fee
Given that DPU for FY2018 was 10.22c, the acquisition is expected to be yield accretive as long as the equity issue price is higher than $1.32.
Based on my earlier calculations, the acquisition is likely to be DPU accretive and NAV neutral to slightly dilutive. Given where CRCT is trading now and what my calculations show earlier, it’s safe to say that the fund raising mix is likely to be a private placement cum preferential offering as indicated in The Edge’s article, with the preferential offering price likely to be within the $1.40s range.
Given this expected structure, I think it is overall a positive deal for the REIT.
There are 2 factors that might push the REIT to raise more equity than anticipated, which will push the yield accretion of the deal downwards.
- The CEO has expressed a desire to hit $5b of assets under management. Post acquisition, the REIT will be at $3.8b of AUM. With the REIT hitting 38% gearing in my proposed deal structure, it leaves little room for further acquisitions. As such, the REIT may raise more equity to push gearing back down for future acquisitions.
- The swap deal where CRCT swaps CapitaMall Saihan for a mall in Hohhot is slatted to close only in 2H 2020. As part of that deal, CRCT has to cough up another about RMB$350m of cash to complete that transaction. As such, the REIT may raise more equity as well in preparation for that transaction.
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